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1. Understand the limitations of personal lines
“For a tenant-occupied rental, often the go-to is to write the property on a personal lines DP-3 which will typically come with a $300,000 limit of liability,” he said. “And for clients who want a higher limit of liability, you may also opt for a personal umbrella. This is simple and can work just fine for some situations. But there are many reasons this approach may fall short.
“What happens when the property sits vacant between tenants? Or if the property is undergoing cosmetic renovation before putting placing a tenant? Many dwelling forms do not accommodate for vacant or renovation properties.
“How do you manage their portfolio as they buy and sell more and more properties? Most personal lines insurers limit the number of rental properties they will allow an individual to carry. Additionally, if the investment property is owned by an LLC, Trust, or other entity different from the named insured on your homeowners’ and umbrella policies, coverage may not be afforded for incidents that occur on the property. Properties owned by an entity may not be insurable under a dwelling policy at all. So, if your client has more than four or five properties, and property titles are not in their personal name, this simply won’t work.”
“Arguably, the bigger issues from a coverage perspective come from the liability exposures.”
2. Pay attention to harmful liability exposures
“Personal lines liability limits typically have defense costs inside of the coverage limits,” he noted. “With a limit of $300,000 – $500,000, defense costs can severely limit the amount that can be applied to a payout.
“Many personal lines policies contain a ‘Total Pollution Exclusion.’ This means your client has an exposure if they have a tenant who gets sick, or worse, passes away from what is determined to be carbon monoxide poisoning. Since an umbrella policy follows the exclusions of the underlying liability, this exclusion means they are left defending themselves in a wrongful death suit.
“Some personal lines umbrella policies also contain a ‘Total Business Venture’ exclusion, which could exclude damages or lawsuits on a rental property because it produces, or is intended to produce, income.
“And also be aware of canine liability exclusions or breed limitations. Many personal lines policies list 12-14 of the most vicious breeds that are excluded from coverage. While some investors do not allow dogs as part of their lease agreement, this can still leave an exposure for the unexpected on the premises.”
3. Utilize a commercial form
“I’d recommend that real estate investment properties be treated as the business they are and insure them on a commercial policy form,” he offered. “Not only is the commercial property form written in a way to properly protect the landlord with coverages like loss of rents, but a commercial general liability policy also typically solves the exclusions exposures listed above. And with dedicated per property limits starting at $1 million per occurrence (with defense costs outside of this limit), an umbrella policy can often be unnecessary.
“Writing coverage on a commercial form also helps to insulate an investor’s personal assets and business assets from one another. Imagine an investor is sued for the wrongful death of one of their tenants. The lawsuit could easily exceed the $300,000 limit typical on a personal lines policy. If an umbrella liability policy collectively insures everything that the investor owns in both personal and investment business, the injured third party could go after the investor’s personal assets. Looking at the other side, an investor causes a car crash that kills another driver. The wrongful death lawsuit by the driver’s family can come after the investment properties if these assets are lumped together.”
4. Take stock of market and service challenges
“After several years of frequent and catastrophic losses, it is becoming increasingly difficult to find carriers with an appetite for the risk that comes with insuring investment properties,” he noted. “Carriers are limiting capacity, especially in areas prone to named windstorm and wildfire, and are concerned about the added risk that comes with tenant-occupied, vacant, and properties under renovation. All of this has led to uncertainty around who still plays in this space, and difficulty finding competitive rates to win an account.
“Real estate investors can also pose unique challenges for agents beyond finding the right coverage and carrier. Frequent changes to a property’s occupancy can mean canceling and re-writing coverage every few months when a renovation is complete and the location sits vacant, then when a vacant property gains a new tenant, or is sold. When an investor buys a new property, you have to start the application process from scratch each time. Canceling policies, issuing refunds, piecing together appropriate coverage across multiple carriers, and managing multiple annual renewal dates as the portfolio grows is a headache.”
5. Pinpoint solutions to these challenges
“The answer to these challenges for agents, and in turn, their real estate investor clients, is the REInsurePro program,” he said. “REInsurePro’s real estate investment program is underwritten by an arsenal of ‘A-rated’ carriers with an appetite for the unique risks these properties carry, even in catastrophic prone areas. By largely partnering with national excess and surplus carriers, REInsurePro has been able to build a flexible and competitively priced program for any type of real estate investment property.
“The monthly reporting form is structured for investors’ frequently changing portfolios, with the ability to make seamless coverage changes between occupancy status each month without the need to cancel and rewrite policies. Understanding that real estate investors are able to leverage their industry relationships and are typically not paying retail rates for repairs and materials, REInsurePro allows investors to carry replacement cost coverage at a much lower cost per square foot than many insurers ($70) and has no co-insurance penalty at or more than $50 per square foot.
“Better yet, REInsurePro gives agents direct access to propose and bind coverage through our market-leading technology platform, customizing coverage to meet lending requirements with flood, earth movement, equipment breakdown, ordinance or law and more. Then servicing your client as their portfolio changes each month, with all of their properties on one reporting and billing schedule. You avoid the hassle of tracking different renewal dates as the coverage remains effective until cancelled.”